Friday, July 31, 2015

This is a repost of a previous article for new readers who may have missed it

---------------------------------------------------------------------------------------------------------------We are now in mid summer so it's time to take a quick look at where we stand on the two big questions we are following here on the blog. They are:1) Will we get another major global financial crisis anytime soon?2) Will the SDR used at the IMF eventually be the basis for a global reserve currency?How these questions are answered will determine if we will really see major monetary system changes that impact the daily lives of all of us. While there may be other interesting questions to look at, the focus here is on these two. Here is why:If we do not get another major global financial crisis any time soon, the odds of any kind of sudden major monetary system changes drop significantly. Having followed this topic for quite a while now, what I see is that change actually happens very slowly. To get major change at a global level is very hard. There are all kinds of roadblocks to cooperation at the global level. Without a crisis, those roadblocks tend to just stay in place and prevent or drastically slow down change. Especially significant change.Let's use what just happened in Greece as an example. Did you notice how nothing happened until the people in Greece felt as if a real crisis was about to take place? Lots of drama and talks took place, but nothing was actually being done. When the banks were closed and people suddenly had to live in fear of what might happen next (experienced what felt like a real crisis), they quickly caved in to all kinds of changes they had refused to accept for months. This is a perfect example of now human nature really works. Therefore, absent another major global financial crisis, we can expect change to happen very slowly if at all.In regards to the second question, a crisis could bring it into play as well. If there is another major financial crisis bigger than 2008, Jim Rickards predicts that the IMF will step forward in that crisis and become the new "global central bank" using the SDR as a global reserve asset replacement for the US dollar. Obviously, if Jim is right, the SDR will be a part of major monetary system change in the future.I do see another way forward for this to happen though even if there is not another major crisis. There is already a movement underway to get the Chinese Yuan accepted as a global reserve currency. Over time, the currencies in the SDR basket will likely slowly reduce the priority status of the US dollar. Eventually, we might see the SDR rules changed such that the SDR could be tied in to a global reserve currency that everyone could own and use if they wanted to do so. I can see this being a digital currency as well and perhaps with an asset backing to add confidence and stability to it. Without a crisis this process might take years to decades to emerge, but it would be major monetary system change from where we are today and would impact our daily lives eventually.Being honest, right now I have no hard evidence that another major crisis is coming any time soon or that we will see the SDR emerge as a global reserve currency any time soon. There are still plenty of credible analysts predicting we will get a major crisis this fall. Other credible analysts predict a crisis, but without a definite time frame. Then we have other likely sincere people who think very hard times are about to hit the US and the world (here is an example of the that view)So far, the most accurate forecaster I have here is a high level reader here who prefers to remain anonymous. This reader has very accurately predicted the US dollar rise, what is happening now in Greece (fall in credibility of the Greek government), the problems that Bitcoin would encounter (here is just one example), and that another crisis was not not likely to happen soon despite risks that exist. The feeling inside the system is that we are not on the verge of another major systemic crisis.The truth is that none of us knows for sure what will happen in the future. Jim Rickards gets a lot of predictions right, but also misses one now and then. The important one we follow here is his prediction of another major global crisis, which is yet to be determined.The summer looks like it will come and go without any major crisis. We know the conditions for one exist all the time, but there is nothing suggesting that one is imminent right now. Of course, if Jim Rickards is right, none of us (including himself) will see it coming ahead of time. This is why it is wise to already have a backup plan and emergency fund in place that you hope you never need to use.What we will do here is continue to follow news and events that could impact our two big questions. This fall we will find out how things go with the IMF decision about adding the Yuan into the SDR basket . This by itself is not a big deal. But it is another step on the path towards bigger monetary system changes in the future. If we get past October without a major crisis, a lot of those predicting that event will have been wrong on their timing. All we can do here is follow events and see what actually does happen. We make no claim to know the future here. Most places that cover the topics we cover here have a point of view that they push. Mainstream sources tend to take the view that another crisis is nothing to worry about and things are fine. Those predicting a crisis pretty much stick to that view no matter what happens. Their timing varies, but most expect one for sure within the next 2-3 years.Readers here get to see a wide variety of credible views and information that you are not likely to find collected in one place elsewhere, so whatever happens should not come as a big surprise. We just try to report all credible views we can find and let you decide.

Jim Rickards writes this new article for investors in Australia. The article is written to them but covers the global macro economic situation. Below are a few quotes. You can read the full article here.

Nobody could doubt that Muhammad Ali is one of the greatest boxers of all time.

He calls himself ‘The Greatest’, but among fans and sportswriters, he is also ‘the People’s Champion’. That’s because of his popularity and ability to connect with everyday citizens around the world.

Ali’s lifetime record in professional fights was 56–5 with 37 knockouts. Before becoming a pro, he won a gold medal for the US Olympic boxing team in the 1960 Olympics in Rome.

Ali did not look like the most intimidating boxer in the ring. Others, like Sonny Liston and Joe Frazier, had fiercer demeanours.

But Ali had a combination of smarts, agility and creativity that none of his opponents could match. He declared he could ‘float like a butterfly and sting like a bee’ in the ring. This was a way to capture the combination of his fluid motion and lightning-like knockout punch.

Ali also invented a technique he called ‘rope-a-dope’. The idea was simple, but few boxers could pull it off. Ali would lean back on the ropes and absorb punishment from his opponent, even pretending to be weakened. Then he would bounce off the ropes, strike back and inflict a powerful combination of painful blows on his opponent.

The point of rope-a-dope was not that it worked once, but that it worked repeatedly. Opponents could not resist the sight of a seemingly weakened Ali leaning on the ropes. The result was always the same — a refreshed Ali would lash out, cause real damage and eventually win the fight.

You can understand the global economy today as an exercise in rope-a-dope. On one side, you have the forces of deflation…and on the other, the forecasts and policy experiments of central bankers.

Thursday, July 30, 2015

CNBC asked readers to vote on when they think the US Fed will raise interest rates. You can see the poll and the latest results here. One thing that is interesting about this is that it is unusual for the Fed to raise rates heading into an election year so we will see if that has any influence on them.

In this breakout from the webinar, Jim talks about his recent conversation with Ben Bernanke at a conference in South Korea where both were invited to speak recently. I put a few key points in bold type. I have a few added comments at the end of this post.

JW: Speaking of the Fed, you were recently invited to a financial conference in Seoul as one of two keynote speakers. The other keynote speaker with you was former Federal Reserve Chairman Ben Bernanke. That’s quite some invitation. I understand you had the opportunity to engage Mr. Bernanke in an extended private conversation. Tell us about that encounter and what you gleaned from it.

JR: We were in Seoul, South Korea. It was a large conference, but we were the only two keynote speakers along with a couple of other panelists. They had a VIP reception for about ten of us including me, the former Chairman, and the VIPs of the Korean banking establishment. There was the head of the Korean Stock Exchange, one officer from the Korean Central Bank, and the head Korean securities regulator. Chairman Bernanke and I were the only Americans.

We had a nice chat and actually had a few laughs. I was one of a group of people who had helped to organize and set up the Center for Financial Economics at Johns Hopkins University. We worked hard to get an absolutely first-rate director, which we did, and no sooner did we get our director than Bernanke called him up and hired him away to come work at the Fed to be head of communications for a couple of years. I tease my friend and call him the Minister of Propaganda, because he’s the guy who was writing all these forward guidance statements that people were pulling their hair out over. I accused the Chairman of picking off our guy. He said, “Well, we didn’t pick him off. We just borrowed him. We gave him back,” which is true because our Director is back at the center, I’m glad to say.

Mr. Bernanke was very kind. I had a copy of his book with me and asked him to inscribe it, which he did very nicely. As an author myself, I know that whenever anyone asks you to sign a book, you always do it in a heartbeat. You never turn it down. He was very kind to sign the book.

He said a number of interesting things one of which was very striking to me. When talking about a rate increase, because that’s all anybody wants to talk about, he used the phrase, “The rate increase, when it comes, will be good news for the U.S. economy because it means growth is getting stronger.”

That’s a perfectly sensible thing to say. This idea that you raise rates and that makes the economy stronger is exactly backwards. The way it works is the economy gets stronger and then you raise rates. In other words, the Fed always follows the market, it doesn’t lead the market. There’s almost this magical or mystical belief that if Janet Yellen raises interest rates, it must mean everything’s all good. It doesn’t mean that all. In fact, if she raises rates in a weak economy, it would be a disaster. We’d have a meltdown.

What Bernanke said did make sense. He said, “The rate increase, when it comes, will be good news because it means the economy in getting stronger.” But then you have to look at the data, which is really weak. By saying “when it comes,” it told me that he wasn’t expecting it anytime soon. In other words, he was conditioning it on economic growth but didn’t suggest at all September, December, this year or any particular time, and he clearly conditioned it on stronger growth, which there is no sign of.

I thought he pulled the rug out from under Janet Yellen. Janet Yellen is trying to have it both ways. She’s trying to get out there, put on a brave face, and talk every day about raising rates later this year. All the headline writers and reporters run right out and write a headline: “Janet Yellen Says We’re Going to Raise Rates This Year.” Forget the headlines. If you actually read the speeches or listen to the testament and look at what she says, it’s always conditioned on stronger growth and economic conditions meeting her forecast. The forecast is three parts: lower unemployment, higher inflation, and stronger growth.

We’re not getting to any three of the levels that she specified in her May 22nd Providence speech. I read an interesting speech she did last Friday in Cleveland, and I found the May 22nd Providence speech to be a lot more specific about the numeric goals she’s looking at. I think she really told us what her playbook is. Based on that, we’re not getting close to any of them, so I don’t see a rate increase. That was consistent with what Bernanke said, and I agree with the former Chairman. People who are expecting Janet Yellen to raise rates are not listening carefully enough to what she’s truly saying.

Another interesting thing he expressed was when he talked about the international monetary system. Now we’re talking about IMF, currency wars, Special Drawing Rights (SDR), and all the things I spend a lot of time researching and writing and talking about. It’s a little unusual for the Fed Chairman to be immersed in that because that’s really the job of the Treasury.

The Treasury Secretary is supposed to be worried about the international standing of the U.S. dollar, and the Fed is supposed to worry about domestic monetary policy. The Fed’s not supposed to have a big footprint in the international monetary system, yet he told me that he was involved working with the IMF to restructure Chinese participation in the voting rights of the IMF.

I was a little surprised at that. He’s clearly competent to do that, but to see the Chairman of the Fed working hand-in-glove with the IMF and the Secretary of the Treasury on Chinese voting rights in the IMF was a little bit unusual. I thought, “Gee, you’re really out of the Fed’s comfort zone.” Then he went on to say that the international monetary system is incoherent. That was his exact word – “incoherent” – which I agree with. It is incoherent. It’s a mess. About ten days later I was in the United States down in Washington and had a conversation with John Lipsky. John is the former Director of the IMF. In a separate conversation, he used the exact same word. He said. “The international monetary system is incoherent.”

I don’t think Bernanke and Lipsky were coordinating their remarks, certainly not to me, but I did find it striking that the former Chairman of the Fed and the former head of the IMF both used the exact same word to describe what’s going on, specifically “incoherent,” which tells me that’s it’s in the air. The elites – the people who really run the global monetary system – are on the same page. We’re going to need new rules to the game, new rules to the playbook for the international monetary system, starting in the fall with the inclusion of the Chinese yuan in the SDR. I think we can all see that coming. They may go beyond not only changing Chinese voting rights, but also maybe issuing some SDRs. We have to watch that.

We’re halfway back to Bretton Woods. We have an informal peg right now going on between the Chinese yuan and the U.S. dollar, around 6.2 to 1. That’s been very stable. The Chinese are not playing the currency war card as they did from 2006 to 2014. They’re on their best behavior hoping to join this exclusive SDR club. I’ll certainly watch that very closely.

It was an interesting conversation, and I’ll briefly mention a third thing Bernanke was very candid about. He used the word “experiment” repeatedly. In other words, he said that what they and the Fed did with monetary policy from 2007 to early 2014 when he left was an experiment, which means they didn’t really know what they were doing. They were just trying stuff. He talked about FDR, Franklin Delano Roosevelt, and what was a very popular term in the ‘30s during the Great Depression. The New Deal was a government-instituted series of experimental projects and programs. “We were just going to experiment to see what worked.”

The thought crossed my mind that most experiments actually fail, and I was hoping that he hadn’t blown up the laboratory in the process. The jury is still out on the success of his time at the head of the Fed, but he was candid about the fact that they don’t really know what they’re doing.

Perhaps the most significant information in the entire webinar are the comments I put in bold above about the international monetary system being "incoherent". If you have been reading this blog you are not surprised by those remarks. We have published numerous blog articles quoting key figures in the international monetary system talking about "blind spots" in the system and calling for "new rules of the game". The call for "new rules of the game" is a call for major monetary system change.

Since that is what this blog is all about, these are all very significant comments. Right now it seems the monetary system might go in one of two directions in the future. It might become more centralized and coordinated with the IMF becoming a much more influential organization or it might break down and become more decentralized. In a complex system, no one can be sure what will happen.

The first step towards decentralization might be a full scale abandonment by the BRICS nations of the IMF and the World Bank. We are nowhere near that happening right now, but this fall it will be important to see what happens with the IMF decision on the Yuan entering the SDR currency basket. It is a signal as to which way things are going. The odds favor inclusion of the Yuan right now.

We will cover it here and see what actually does happen and how it might impact us in our daily lives.

Wednesday, July 29, 2015

IMF Deputy Director David Lipton suggested in an interview on last Saturday that the next head of the IMF might come from outside Europe. This Reuters article quotes him as saying, "with candidates coming from around the world, I think it's much more likely the next time around than it has ever been." Below are a few quotes from the article and then an added comment.

The next managing director of the International Monetary Fund is likely to come from outside Europe when current leader Christine Lagarde eventually leaves, the deputy head of the Washington-based fund said in an interview broadcast on Saturday.

IMF First Deputy Managing Director David Lipton told the BBC World Service the tradition by which a European heads the fund while an American leads the World Bank was coming under pressure and the next appointment would be "strictly merit-based".

Described on the same radio program as an "incredible anachronism" by former IMF Chief Economist Kenneth Rogoff, the convention that has ensured that Europeans lead the fund has been increasingly challenged during the euro zone crisis.

Lipton said that when Lagarde steps down, her successor would probably come from a non-European country.

"With candidates coming forward from around the world, I think it's much more likely the next time around than it has ever been," he said.

You have to wonder what China and the other BRICS nations think when they hear things like this from the IMF. It seems like more influence outside the western powers is always some kind of distant "some day in the future" kind of thing. In this case, after quoting IMF Deputy Director as saying it's much more likely this time around, the article makes this observation:

"Lagarde, a former French finance minister, took over as head of the IMF in 2011 after her predecessor, Dominique Strauss-Kahn was forced to resign over a sex scandal.

Her five-year term comes to an end next year but she was quoted last month as saying she would consider a second term if she had the support of the IMF's members."

If you are China, does this sound like someone saying, hang in there and maybe six years from now someone outside Europe will get to the head the IMF? I guess since China has shown it will wait six years or more for IMF governance reforms, this makes perfect sense.

Continuing this series breaking out Jim Rickards recent webinar, here are his thoughts on what is happening in China. I put a few key points in bold type.

JW: Let’s turn from Greece to China, where there’s been some measure of recovery from the stock market collapse. We were all following it with great interest, but how serious was this collapse? It looked huge on the charts, but after all, the fall in values was only to levels seen as recently as March of this year. Is the bigger story perhaps the zealous interventions of the Chinese authorities?

JR: I think both stories are big. Let’s take them separately. First of all, I would not refer to this crash in the past tense. It’s actually just starting. I was on television last fall looking at the Shanghai Composite Stock Index and said, “This is a bubble that’s going to crash.” To me, it was very apparent. Bubbles are not that difficult to spot.

When it did crash, I called attention to that and said, “Hey, I was out there a while ago saying this was a bubble that was going to crash.” Somebody immediately came back and pointed out that the level at which I made that forecast was actually below where it was after the so-called crash. In other words, if you had ignored me and bought stocks, you would still have made money.

I’m not in the business of picking tops and bottoms or picking exact turning points. I am in the business of analyzing system dynamics and trying to understand where those dynamics are going so that we can stay ahead of the curve and not be surprised by these things, whether it’s Greece or the Chinese stock market and so forth.

Yes, it is correct that it was off the top and crashed pretty hard – about 30% – but even at the 30% level, it ran up so much that even after going down 30%, it was still above the level where it was at the beginning of the year. But it’s not over. When bubbles break, they don’t go straight down to the bottom. They go down, bounce up, down again, and then they bounce up a little bit. We hear people saying, “Buy the dips.” They buy the dips, it goes up, it goes down again, and some people say, “There’s another dip. Buy the dip,” etc. It’s a process of denial, a process of stages, an irregular process. It doesn’t go straight down.

I suggest that analysts or investors take two stock charts that actually look very alike, the Dow Jones Industrial Index from 1927 to 1933 or the NASDAQ stock market from 1996 to 2001. Either one of them will do fine. Then just normalize it and overlay it on top of the Shanghai Composite. What you’ll see is that the run up looks quite similar. It gets strong, it gets momentum, and then it goes hyperbolic. Then it goes straight up, it gaps up, and then it breaks. You’ll see is that Shanghai is nowhere near a bottom.

Everybody remembers October 21, 1929, when the U.S. stock market went down almost 25% over a two-day period. That was just the beginning. The market didn’t hit bottom until 1933. It took four years to grind its way down and was down 90% by the time it was done, not 20% or 30%.

It was the same thing with NASDAQ when it broke in January 2000. It found its way back not to the old high, but it went up a little bit and ground down a little bit. Then it broke sharply and ended up down 80%. So if you look at those stock charts and look at what’s going on in Shanghai, I would say that this crash has just begun.

Coming to your second point, the Chinese government has used extraordinary measures that are fairly well-known. They did a whole host of things to basically stop the fall. They banned short selling which seems to be the first thing everybody does. Then they told institutions they were not allowed to sell at all. Then they limited margin accounts. They also came up with a $19 billion investment fund. So they got all the brokers to buy stocks, they told the institutions they were not allowed to sell stocks, they eliminated short selling, and they did a number of other things. Who knows what they did that we don’t know about?

It was an extraordinary effort, but it hasn’t really worked. It stopped that crash dynamic and put a floor under it, but it hasn’t caused it to rally very much. I wouldn’t expect it to. This process is just beginning, so yes, it is very serious.

By the way, this doesn’t mean that the Chinese economy is falling apart. Growth has slowed down a lot, and that’s a big deal for the world because they are about 10% of global GDP, but the economy hasn’t ground to a halt. This is a stock market crash and a capital markets problem. A lot of individual investors are getting wiped out, and it could be a social problem for the Communist Party and the authority of the Communist Party.

I expect it to go down a lot more, but I would watch very closely. It’s far from over. It has that dynamic to it where it could to go down another 50% from here, go up and down a little bit, and fluctuate. This is really just beginning, and it’s a serious problem for people who threw money into it.

Meanwhile, the elites – the princelings, senior Communist party members, CEOs, owners of state-owned enterprises, and other mega-wealthy in China – are getting their money out as fast as they can. They have been for years as I covered in Chapter 4 of The Death of Money.

I travel around the world quite a bit. Go to Vancouver, British Columbia or Melbourne, Australia or Istanbul, Turkey or London or Paris – I was just in London and Paris last week – and you hear the exact same story. High-end condos are going through the roof. They’re being bought up by mostly Chinese money among others – maybe some Russian oligarchs and South American drug lords as well.

You have to be connected to get your money out of China. You may be upper middle class – perhaps you own five McDonald’s restaurants in Wuhan or a chain of 7-Elevens in Chongqing or a car dealership in Shanghai — you’re not poor but you’re not mega-wealthy. You may have a few million dollars saved up, but you still cannot get your money out of China very easily. If you are mega-wealthy worth $100 million or $500 million or $1 billion as many of these Chinese princelings are, there are a lot of ways to get money out of the country either through corruption, the ability to have offshore companies, transfer pricing, rigging fake losses in a casino, etc.

What does it tell you if the smartest, richest, most connected people in China are getting their money out? How much confidence do they have in their own economy? The stock market is a problem, but it’s not the only problem. There is a lot of rot in that society. You could be looking at social unrest down the road.

As I said, I think their stock market has a long way go down, so I wouldn’t invest a nickel in China. There are other reasons for that. For example, if you’re a large business, they steal your intellectual property. China is a fascinating story. It’s an old culture, a strong economy, and an important player in the international monetary system. I watch it from the global macro international monetary perspective, but it has so many problems and so much opaqueness that I wouldn’t recommend anyone investing in it.

JW: Is the implication then that this collapse is a very special case? Or is there anything to draw from it in a larger sense about stock market investment and what can happen from an investor’s point of view?

JR: It’s a special case in the sense that China’s stock market is collapsing. This is not happening elsewhere in the world. The European stock industries are doing okay, and Europe’s growth seems to be a little bit better.

The U.S. looks like it peaked last November – not literally peaked, but it’s reached a few new highs since then although not very much higher than it was last fall. The U.S. stock market is going sideways in what I call ‘non-directional volatility.’ There are days when it’s up 200 points, down 150 points, up 90, and down 80. Looking at a chart of the S&P and the Dow Jones, they’re wiggling sideways with a lot of volatility. Job creation seems to have slowed down as have a lot of things, so it looks like the U.S. is not quite in a recession, but we’re close to one. Growth really hit a wall as to the stock market late last year.

I don’t see the bubble crash dynamic in other major stock markets that I do in China. China seems to be unique in that case. I look at the interconnectedness, what I call density function or the potential for either what’s called contagion or what the IMF calls spillover effects. What are the odds that a crisis in one country spills over and causes a crisis in another country? That’s always a potential problem and something I look at very closely.

The Greece thing seems to have been contained to Europe so far and not too much damage was done to capital markets. Obviously, this is extremely painful for the people of Greece as they have to sacrifice: their pensions are being cut, their unit labor costs are going down, wages are going down, and unemployment is going up. There are a lot of problems inside Greece, although that could bottom and turn around pretty quickly once banks reopen, they get access to capital, and maybe some Chinese capital comes in. You might look for a turnaround in Greece, but there was no real contagion, although I think there would have been if Greece had left the euro.

The China thing does seem to be unique to China. Looking back a week ago Wednesday when we had that awful sequence of events, it looked like Greece was collapsing, China was collapsing, and the New York Stock Exchange was closed for some software problems all at the same time. Two of those things are behind us – the Greece thing and New York Stock Exchange closing – and regarding China, I think markets have absorbed that.

These don’t look like the kinds of things that will set the world on fire, if you will, or start global contagion, but they are warnings of how unstable a lot of things are.I always say that the thing that will cause a global panic is the thing we don’t expect. We could see the Chinese event coming. I talked about it on television last year in 2014. I may have been early – that’s fine – but we could see it coming a mile away. And we’ve been talking about Greece for five years, so as dangerous as those things were, neither one of them were unexpected.

One reason to own gold, one reason to be prepared and not wait for a crisis, is that when the crisis comes, it will be something we don’t expect and there won’t be time to get ready. The time to get ready is now.

Tuesday, July 28, 2015

Every now and then I run across interesting off topic articles while doing research for the blog. This is one of those positive stories that offers the idea that, despite problems and challenges the world faces, there are always creative people moving forward with new ideas that can possibly change things for the better. Here is a link to such a story that appeared recently on Fox News. Below are a few quotes.

Tough drought conditions in parts of the U.S. make growing fruits and vegetables an increasing challenge for farmers.

To tackle this widespread issue, a group of divers are leading a new venture to test whether farming underwater could be a viable alternative.

"Nemo’s Garden", a project started by the Italy-based Ocean Reef Group, has built small transparent balloons in the Mediterranean sea to test this idea. Inside the structures, developers installed a ring of vases with seeds to see how they would grow.

One of the project’s managers, Luca Gamberini gave FoxNews.com a tour of his organization’s undersea garden.

“Three years ago, my dad thought ‘how can I make scuba divers have an interesting [job]’ … he put together two of his passions, scuba diving and gardening,” said Gamberini.

He explained that a combination of necessity and “crazy ideas, mixed with relentless imagination soon became a real life experiment - from there, and from the success we achieved immediately we saw an opportunity to feed the world, especially regions where natural resources like soil, weather conditions, temperature conditions, parasites, lack of fresh water, are scarce or nonexistent.”

The project has partnered with World Expo 2015 in Milan. Their motto, “Feeding the Planet, Energy for Life” has become an inspiration for “Nemo’s Garden”.

The recent webinar that Jim Rickards did contained several very good questions allowing him to go into a lot of depth in his answers. What I decided to do is to breakout the best questions and answers in this webinar and do a separate blog post for a major topic discussed in the webinar over the next three days. We will look at Greece, China, and Jim's recent conversation with Ben Bernanke.

This format makes it easier to read and spend some time with each topic. First up is the conversation on Greece. I added bold type where I felt some key points were being made.

JW: Greece has been the hot topic until just a few days ago, but as you predicted, there has been no Grexit. In fact, it transpires that the Greek government, for all its bluster, really had no serious contingency plans for leaving the euro. I’m left wondering, how close did we come to an actual meltdown here?

JR: It’s a great question, Jon, an important one, and you’re right. Remember that this whole Greek sovereign debt crisis started in 2010. There’s nothing new about it. It’s been going through stages of quiet periods and intense periods for the past five years.

Beginning in 2010 and continuing through this past weekend, I was one of the voices saying that Greece would not leave the euro. I think most voices were on the other side. They didn’t see how they could stay in. Even today, I saw that Austan Goolsbee, who was one of the members of the Council of Economic Advisers to President Obama, published a piece saying they’re in for now, but in the long run, they can’t possibly remain in. He listed a bunch of reasons although I thought he left out a couple.

The point is, no matter how many challenges you overcome, people just can’t get their minds around the fact that this is Hotel California. You get in; you can’t get out. There’s no treaty provision, no legal provision, for exiting. Now, that wouldn’t stop a sovereign power from simply unilaterally declaring they were breaching the treaty. That is possible, even though it would be messy. I’ve always understood this not as an economic project but as a political project. Once you see it as a political project with other goals in mind, then you can understand that the political will is there to keep it together, and indeed it has stayed together.

That’s fine as far as it goes, and I will say it’s nice to get these things right.Some people have complimented me on that. The temptation is always to take a victory lap, but the fact is, this was a lot more dangerous and came a lot closer to a Grexit than I would have thought. In other words, I got the result right, but the process was a lot more challenging.

I was up late Sunday night New York time which was early Monday morning in Brussels. The summit conference actually set a record for the longest euro summit conference with almost 24 hours of continuous meetings. There was some pretty good reporting. You could pick things up on Twitter from reporters who were outside the room, so you were getting as close to real-time information as you possible.

I always felt that Germany and Greece would both blink, that they both considered a Grexit – Greece leaving the euro – would cause more harm than whatever it was they had to do to keep Greece in. But in the end, Germany didn’t blink, at least not very much. It was Greece that had to do all the concessions, and it became apparent that Germany was prepared to see Greece leave.

I’ve been in a lot of tough negotiations, and the only way you get a good result in any negotiation is if you’re prepared to walk away. If you make it clear at the table that you’ll pay any price or do anything, whatever it takes, to get a deal done, then the other side will take advantage of you one way or another. To get a good deal, you have to be prepared to let the deal go down.

That was always dangerous as far as the euro was concerned. I took the strong view that there would be no Grexit, but I also said that if I was wrong and there was a Grexit, it wasn’t going to be contained. It wasn’t going to be the non-event a lot of people were expecting, and that it would be catastrophic in its consequences.

That became very apparent Sunday morning when markets seemed to be a little bit complacent. When it became obvious that Germany was prepared to see Greece go, then you start to think through what that meant. The only way I could understand it was that Germany understood the consequences but felt it would be really bad for the rest of the world. In other words, it might be the United States and certainly the Greeks themselves who would have to bear the brunt of it, rather than Germany.

There might be some truth to that, but the good news is that Greece did not leave. There was no Grexit, and the eurozone has held together. I expect that will continue to be the case and that they will add new members.

I went through this in some detail in Chapter 5 of my book The Death of Money. Anyone who read the book last year would have seen this result coming because I outlined it in detail. I expect that will continue to be the case, but it was a far more dangerous situation.

I will say that late Sunday night New York time was the most critical, most dangerous moment in global capital markets since the Lehman Brothers weekend in mid-September 2008. It didn’t result in a collapse; the world didn’t actually fall apart, but it came dangerously close. I guess I would say that I’m glad we got the call right, but it did look a lot more dangerous than I thought, and that’s something that should bear watching in the future because the danger has not really gone away.

JW: There’s one footnote to the Greek story that you picked up in your newsletter, Strategic Intelligence. You report that in response to the crisis, Greece banned the sale of gold to its citizens. This may be a point of interest to our listeners here. Do you have any comment on that?

JR: I did notice that, and it’s very typical of what governments do in a crisis situation. We all know that the banks were closed and the ATMs were reprogrammed to allow 60 euros a day. We all saw the queues of Greek citizens lined up to get 60 euros – roughly $100 or so – out of the banks.

When I saw those pictures a week ago Sunday, I certainly felt a lot of sympathy towards the people in that situation, but I thought to myself, “Gee, what were you waiting for? You could see this coming a mile away. Why weren’t you at the ATM a month ago, two months ago, six months ago or a year ago getting some cash and putting it in a safe place of contingency for exactly this kind of thing?” This has happened in Cyprus, it’s happened in Greece, and it will happen again. I can see this happening even in the United States in the next financial crisis, one that I expect will be worse than 2008.

That brings us to gold. You get your money if you can – that’s easier said than done – but what do you do with it? Authorities did not want people buying gold. You could say, “I’m going to get my euros out of the bank. I’m a Greek citizen; I don’t trust the Greek banks, so I’m going to get my euros out of the bank.” But what would happen if Greece was kicked out of the euro and the euro itself collapsed? Now you’d have two layers of risk: one, your own banking system, and two, maybe your euros aren’t going to do any good because those two things are correlated.

It’s a lot like when you work at a company and they offer you a generous stock purchase plan. You buy the stock thinking that’s a good investment much like the employees at Enron. Then you wake up one day and find that the company has failed. Well, you get a double-wipe out — you lose your job and your net worth at the same time. By buying your own company’s stock, you’ve doubled down on the company, and if it fails, you lose both your job and your investments. There’s a conditional or hidden correlation there.

The same thing could have been true for Greek citizens. They were lucky to get euros out of the bank – the ones who could – but just because they had their euros doesn’t mean they were home free, because if Greece quit, then the euro itself could have failed. They were doubling down in a way.

What’s the way out of that? One way out is in buying gold, to be protected against both – the Greek banking system and the euro failing – because gold is not correlated to either one of those things. In fact, I think gold could be expected to go up in that kind of catastrophic outcome.

The authorities don’t like that. They probably weren’t happy with the 60 euros a day or anyone who was hoarding cash, but they at least felt, “If we stabilize the system and do the deal with Germany, then those people will show up and put the money back in the bank.”

By the way, that’s exactly what happened in the United States in 1933. As this Greek bank holiday was going on – it was day 5, day 6, day 7 – I was reminding people that, so far at least, the Greek bank holiday had not lasted longer than the U.S. bank holiday. In March 1933, the U.S. closed all banks. Of course, there were no ATMs then, so you couldn’t even go the ATM and get $100. President Roosevelt just closed every bank in the United States by executive order. When they closed, they did not say when they would reopen. It so happened that they reopened about nine days later, but they didn’t say that at the time. They just said the banks were closed until further notice and would let people know when they would reopen.

The reason they closed them was because there was a run on the banks. People had completely lost confidence in the banking system and were running down to get all their money out of the banks. They were putting it in coffee cans and shoeboxes, burying it in the back yard, hiding it under their beds and mattresses or whatever.

As they were taking money out of the banks, a funny thing happened. There were “bank holidays,” so you couldn’t get your money out any longer. During the next nine days, the government went through the exercise or the appearance of examining all the banks. I don’t think they examined very many, but they were at least able to go through the motions – à la Tim Geithner’s stress test – and then announced that the banks that were opening at least were sound. At that point people lined up to put their money back. The banks were closed because of a run on the bank and everybody taking their money out, but then, after they reopened because confidence had been restored, people put their money back.

I’m sure the Greek authorities were hoping for the same thing, meaning people would take the money out, but once things stabilized, they’d come back down to the bank and put money back in. But there’s a problem. If you buy gold, that’s it. If you own gold, you’re not going to walk up to the teller and hand them your gold, so the authorities wanted to ban the sale of gold. Gold is a one-way street. You can always sell it, but you’re much more likely to hang onto it as a form of insurance, which in fact is a good reason to own it.

Authorities – central bankers, bank regulators, and mainstream economists – hate gold, because once people buy gold, they tend not to sell it. They tend to hold onto it to keep as protection against various catastrophic outcomes. I believe we’ll see that again.

I look at Greece and Cyprus as dry runs for the same thing on a much larger scale. Whether it’s in the U.K. or United States or Canada – it could be a lot of countries around the world – these things are being tried out on a small scale. Bail-ins, reprogramming of ATMs, and the ban on gold sales will be used on a much larger scale in the next financial panic.

Going back to the people lined up at ATMs, I say, “What were you waiting for? You should get your cash now if you want cash. Get your gold now if you want gold. Don’t wait for the lockdown.”

Monday, July 27, 2015

As we get closer to finding out what the IMF is going to do about adding in the Yuan to the SDR currency basket, it seems like the IMF is becoming more coy about things. In this Reuters article, there is the suggestion that the IMF has not yet decided to add in the Yuan this year. Below are some quotes and then a few added comments.

"The International Monetary Fund (IMF) has told China about its concern over investors' ability to enter or leave Chinese financial markets as they wish, said sources with direct knowledge of the matter.

Those worries were raised last month when the IMF met with Chinese officials in China to discuss the chances of including the yuan CNY=CFXS in the fund's basket of currencies, also known as the Special Drawing Rights (SDR).

The SDR is an international reserve asset, and Beijing has been lobbying the IMF to include the yuan in the basket to boost the currency's global clout to complement a rising Chinese economy and reduce China's reliance on the dollar .DXY.

The talks were held before Chinese shares plunged as much as a third in late June, prompting Beijing to stage its biggest-ever rescue of the stock market.

The measures, which included steps such as barring some investors from selling their shares, drew criticism of unwarranted government interference and cast doubt on China's appetite for market reforms.

The IMF requires any SDR currency to be "freely usable", a criteria that U.S. Treasury Secretary Jack Lew said in April that China has yet to meet."

While it is impossible for those of us on the outside to know what all is going on in situations like this, there are some facts we can list and perhaps tie together.

- there are many alternative media sites suggesting that China is either planning to back the Yuan with gold (something the US and IMF would not like) or "take over" the IMF from within.

- China has been buying a lot of gold and many sources confirm that fact. However, China recently announced a much smaller gold reserve than virtually all analysts expected (something the US and the IMF might prefer China to do).

-China clearly wants the Yuan to become more globally accepted and sees its inclusion into the SDR currency basket as a key step in that process.

-the Chinese market has taken a sharp dive recently. Some in the alternative media have suggested the US might have been behind this in some way to send a message to China as to who remains in charge in the world and at the IMF.

-China continues to move forward with potential competitors to the IMF and the World Bank (perceived to be US and western dominated institutions) in both the BRICS Bank (NDB) and the AIIB (Asian Infrastructure Investment Bank). On top of that they are also pushing the Silk Road project and more cooperation with Russia in the Shanghai Cooperation Organization. All of these basically exclude the US right now.

If we look at the set of facts above we can at least try to tie them together to see if we can get a picture that makes sense. Right now the most likely scenario is that China (leading the BRICS nations) wants badly to broaden the use of the Yuan around the world. They seem to have set in motion several efforts to that end. They are buying gold, they are pushing the IMF to add the Yuan into the SDR basket, and they are also building up new global financial institutions that have the potential to compete with the IMF and the World Bank even though they talk about "complementing" those institutions. China likes to move very slowly and in a very calculated fashion so these steps all make sense.

It appears that the US wants to allow China some room for more influence at the IMF and to broaden the use of the Yuan, but wants to keep China on a leash so to speak. The US may be trying to keep China in line by offering the carrot of adding the Yuan into the SDR basket so long as China plays ball with US global interests. Those interests might include allowing the US to remain the leading major power at the IMF and not doing anything to promote gold around the world as an alternative to the current fiat system (hence the move by China to report lower gold reserves than expected).

It looks like China may be OK with those terms, but is slowly and steadily moving forward with the new NDB and AIIB so that they always have a Plan B to go to if relations with the US and the western institutions go south. China can also use these new institutions as leverage to pressure the US and the west to give them more influence in the global financial system. Think of all this like moves in a chess game if you will.

If this analysis is correct, this fall will be very interesting. We will find out if the US/IMF and China can conclude a deal that both sides can live with going forward. If you see the Yuan get added into the SDR basket now, it implies that such a deal has been struck. If that does not happen at this five year review by the IMF, it could imply that China may shift the bulk of its efforts going forward into the NDB and the AIIB. This could lead to a competition that is more confrontational than complementary between the global institutions. It will be interesting to see what China does with their gold as well (don't forget that Russia also continues to add large gold reserves).

By watching for these signs this fall, we may get an idea if the world is headed for more cooperation at the global level or more decentralization (and less cooperation). The actual addition of the Yuan into the SDR basket by itself is not likely to initiate any major monetary system changes. But it may very well signal which way things are headed and how some bigger changes may unfold later on. We know what to watch and will do that here on the blog.

Sunday, July 26, 2015

As we have noted here on the blog, getting nations to cooperate at any level is no easy task. The Eurozone has demonstrated this recently. The IMF has had to deal with this problem for decades. Now we see that even the BRICS have cooperation issues to deal with. This article by Minghao Zhao in Project Syndicate points out that China has to do a balancing act within BRICS so as not to end up looking like the US does to the BRICS nations. Below are some quotes from the article.

As much of the world focuses on Greece’s travails, the BRICS countries – Brazil, Russia, India, China, and South Africa – have been working to advance their own economic agenda, most recently at their seventh annual summit in the Siberian city of Ufa. But, though Russia hosted the meeting, it is China that was viewed as dominating the grouping. Indeed, the BRICS has already proved to be a force multiplier for Chinese diplomacy, and can remain so if China is careful not to push its national interests too hard.

. . . . "The Chinese government is now going further, urging the rest of the BRICS to institutionalize their cooperation, not just pursue domestic reform. China contends that a stronger BRICS grouping would help to safeguard the interests of all developing countries. To that end, the country is also spearheading the effort to reform the global economic architecture, including by pushing for reforms to the International Monetary Fund’s weighted voting system.But despite such efforts’ potential benefits for emerging and developing economies, they have provoked considerable anxiety among China’s BRICS partners, which fear that its leadership could quickly morph into domination. Beyond fundamental differences in the BRICS’ countries political systems, social values, and cultural traditions – factors that undermine trust and cohesion – there is the obvious fact that China’s economy (not to mention its military) dwarfs the others’."

------------------------------------------------------------------------------------My added comments: This is an aspect of regional and global institutions that often gets overlooked. While governments and central banks do wield much power, they also still have to deal with each other. There are substantial political, cultural, and religious differences involved. All these work against the idea of cooperation above the national level. It's hard enough to get cooperation within nations (especially democratic nations), much less at a higher level.This all tends to slow down significant change which is why rapid change takes place more often during times of crisis. Change under those conditions can be good or bad, but it is more likely to happen quicker when things are unstable. Slower change has the advantage of gaining public acceptance over time when people are not under duress.

Notice:

This site uses cookies from Google to deliver its services, to personalize ads, and to analyze traffic. Information about you use of this site is shared with Google. By using this site, you agree to use of its cookies. The author of this blog does not use any cookie information for any purpose.